SHAREHOLDERS
      AGREEMENT

     

    THIS
      AGREEMENT (this “Agreement”)
      is
      dated as of August 20, 2008 by and among China New Energy Group Company, a
      Delaware corporation (the “Company”),
      Quick
      Rise Investments Limited, Waterpower Investments Limited and Eternal
      International Holding Group Limited (each, an “Existing Shareholder” and
      collectively, the “Existing Shareholders”), and China Hand Fund I, LLC, a
      Delaware limited liability company (“China Hand”, together with Existing
      Shareholders, each a “Shareholder” and collectively, the “Shareholders”).
      Capitalized terms used herein without definition shall have the meanings
      assigned to such terms in the Purchase Agreement.

     

    WHEREAS,
      the Company entered into a Series A Convertible Preferred Stock Securities
      Purchase Agreement dated August 8, 2008 with China Hand (the “Purchase
      Agreement”),
      pursuant to which the Company will issue 1,672,741 shares of its Series A
      Convertible Preferred Stock, par value $.001 per share (“Series
      A Stock”)
      and
      warrants to purchase an aggregate of 334,548 shares of the Company’s Common
      Stock, par value $.001 per share (“Common
      Stock”)
      for an
      aggregate purchase price of $9,000,000 (the transactions contemplated by the
      Purchase Agreement, the “Financing
      Transaction”).
      

     

    WHEREAS,
      to induce China Hand to invest in the Financing Transaction and as a condition
      to the Shareholders’ respective obligations to close the Financing Transaction,
      each Shareholder has agreed not to sell any shares of Common Stock, Series
      A
      Stock or any shares of Common Stock issuable upon conversion of the Series
      A
      Stock or the exercise of the Warrants, as applicable, that such Shareholder
      presently owns or may hereafter acquire, except in accordance with the terms
      and
      conditions set forth herein (collectively, the “Shares”).
      

     

    NOW,
      THEREFORE, in consideration of the covenants and conditions hereinafter
      contained, the parties hereto agree as follows:

     

    1. Effectiveness
      of Agreement.
      This
      Agreement shall become null and void if the Purchase Agreement is terminated
      prior to the closing of such agreement. Each Shareholder has independently
      evaluated the merits of its decision to enter into and deliver this Agreement,
      and such Shareholder confirms that it has not relied on the advice of the
      Company or any other person.

    


    2. Beneficial
      Ownership.
      Each
      Shareholder hereby represents and warrants that it does not beneficially own
      (as
      determined in accordance with Section 13(d) of the Securities Exchange Act
      of
      1934, as amended, and the rules and regulations promulgated thereunder) any
      Shares, or any economic interest therein or derivative therefrom, other than
      those Shares specified on its signature page to this Agreement. 

    


    3. Restriction
      on Transfer by Existing Shareholders; Term.
      Each
      Existing Shareholder hereby agrees that such Existing Shareholder will not
      offer, sell, contract to sell, assign, transfer, hypothecate, pledge or grant
      a
      security interest in, or otherwise dispose of, or enter into any transaction
      which is designed to, or might reasonably be expected to, result in the
      disposition of (whether by actual disposition or effective economic disposition
      due to cash settlement or otherwise, directly or indirectly (each, a
“Transfer”),
      any
      of the Shares owned by such Existing Shareholder at any time for the period
      commencing on the Closing Date and expiring on the date that is twelve (12)
      months following the Effective Date of the Registration Statement resulting
      in
      100% of all the Registrable Securities (as defined in the Registration Rights
      Agreement) being registered for resale (the “Effective
      Date”)
      (plus
      one additional day for each Trading Day following the Effective Date of any
      Registration Statement during which either (1) the Registration Statement
      is not effective or (2) the prospectus forming a portion of the
      Registration Statement is not available for the resale of all Registrable
      Securities (as defined in the Registration Rights Agreement); provided, however,
      that in no event will such restriction on Transfer continue beyond one year
      following the date that China Hand is able to sell all of the Shares held by
      it
      without restriction pursuant to Rule 144 under the Securities Act (the
“Existing
      Shareholder Restrictive Period”).
      Notwithstanding the foregoing, the Existing Shareholders shall be permitted
      to
      make Transfers to Affiliates (as defined below), so long as any such Affiliate
      agrees in writing to be bound by the terms of this Agreement to the same extent
      that the Existing Shareholder is bound.

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    4. Restriction
      on Transfer by China Hand; Term.
      Except
      as permitted under the Transaction Documents, China Hand hereby agrees that
      it
      will not Transfer more than an aggregate of 50% of its Shares (calculated as
      of
      the Closing Date) for the period commencing on the Closing Date and expiring
      on
      the date that is twelve (12) months following the Closing Date (the
“China
      Hand Restrictive Period”).

    


    5. Tag-Along
      Rights in Private Transactions.
      

    


    a. Subject
      to the restrictions set forth in Sections 3 (with respect to the Existing
      Shareholders) and 4 (with respect to China Hand) hereof, during the China Hand
      Restrictive Period, in the event China Hand proposes to make a Tag-Along Sale
      (as defined below), each Existing Shareholder shall have the right to
      participate (a "Tag-Along
      Right")
      in
      such sale with respect to such Existing Shareholder’s Shares (on an as converted
      basis), on a pro rata basis (based on the ratio of the aggregate number of
      the
      Shares (on an as converted basis) to be sold by China Hand to the aggregate
      number of Shares (on an as converted basis) beneficially owned by China Hand
      immediately prior to such sale) on the same terms on which China Hand sells
      its
      Shares. For purpose of clarification and by way of example, if China Hand
      proposes to make a Tag-Along Sale of 10% of its Shares (on an as converted
      basis), each Existing Shareholder shall have the right to participate in such
      Tag-Along Sale with respect to 10% of its Shares (on an as converted basis).
      As
      to each Shareholder participating in the Tag Along Sale (including China Hand),
      the ratio that the number of Shares (on an as converted basis) of such
      Shareholder to be sold in such Tag-Along Sale bears to the total number of
      Shares (on an as converted basis) of all Shareholders to be sold in such
      Tag-Along Transaction is hereafter referred to as “Relative
      Ratio”.
      

    


    b. The
      following terms shall have the meanings set forth below: 

    


    
      	 	
              i.

            	
              "Tag
                Along Sale"
                means the sale or disposition, directly or indirectly, by China Hand,
                in
                one or more transactions (other than a transfer from China Hand to
                an
                Affiliate of China Hand) of any Shares that does not involve registration
                under the Securities Act by the Company of China Hand’s Shares to be sold
                in such sale or disposition, if (i) immediately following such sale
                China
                Hand would have sold in the aggregate calculated as of the date hereof
                50%
                or more of China Hand’s Shares (as such number may be adjusted for stock
                splits, dividends paid in Common Stock, reclassifications of the
                Common
                Stock, and other similar events), and (ii) the number of China Hand’s
                Shares proposed to be sold or disposed of in the Tag-Along Sale in
                the
                aggregate by China Hand is equal to or greater than 10% of China
                Hand’s
                Shares (as such number may be adjusted for stock splits, dividends
                paid in
                Common Stock, reclassifications of the Common Stock, and other similar
                events). 

            


    

    
      	 	
              ii.

            	
              A
                person "beneficially
                owns"
                any shares of any security with respect to which such person would
                be a
                beneficial owner pursuant to Rule 13d-3 promulgated under the Securities
                Exchange Act of 1934, as amended.

            


    

    
      	 	
              iii.

            	
              “Affiliate”
                means, with respect to any Person, any other Person directly or indirectly
                controlling, directly or indirectly controlled by, or under direct
                or
                indirect common control with, such Person or a member of such Person's
                immediate family; or if such Person is a partnership, any general
                partner
                of such Person or a Person controlling any such general partner.
                For
                purposes of this definition, "control" (including "controlled by"
                and
                "under common control with") shall mean the power, directly or indirectly,
                to direct or cause the direction of the management and policies of
                such
                Person whether through the ownership of voting securities, by contract
                or
                otherwise.

            


    

    


    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    c. In
      the
      case of a Tag-Along Sale, if circumstances occur which give rise to the
      Tag-Along Right, China Hand shall give written notice to each Existing
      Shareholder not less than ten (10) days prior to such proposed sale providing
      a
      summary of the terms of the proposed sale to the buyer and advising each such
      Existing Shareholder of its Tag-Along Rights. Each Existing Shareholder may
      exercise its Tag-Along Right (each, a “Tagging
      Shareholder”
and
      collectively, the “Tagging
      Shareholders”)
      by
      written notice to China Hand within five (5) days upon receipt of the notice
      from China Hand stating the number of Shares that it wishes to sell. If the
      prospective purchaser or purchasers of the shares to be sold in such Tag-Along
      Sale declines to purchase the aggregate number of shares sought to be sold
      by
      China Hand and the Tagging Shareholders, China Hand and the Tagging Shareholders
      agree to reduce the number of shares of each participating party to be included
      in such sale on a proportionate basis that preserves the Relative Ratio. If
      a
      Tagging Shareholder gives written notice indicating that such Tagging
      Shareholder wishes to sell shares in the Tag-Along Sale, such Tagging
      Shareholder shall be obligated to sell that number of shares specified in such
      Tagging Shareholder's written acceptance notice (as such number may be reduced
      pursuant to the immediately preceding sentence) for the greatest consideration
      and upon the best terms by which China Hand is selling to the buyer, such
      obligation to be conditioned upon and contemporaneous with completion of the
      transaction of purchase and sale with the buyer. 

    


    d. The
      restrictions on Transfer applicable to the Existing Stockholders shall not
      apply
      to Transfers effected pursuant to a Tag-Along Sale. 

    


    6. Ownership.
      During
      the Existing Shareholder Restrictive Period or the China Hand Restrictive
      Period, as applicable, each Shareholder shall retain all rights of ownership
      in
      the Shares, including, without limitation, voting rights and the right to
      receive any dividends, if any, that may be declared in respect
      thereof.

    


    7. Representations
      and Warranties.
      Each of
      the parties hereto, by their respective execution and delivery of this
      Agreement, hereby represents and warrants to the others and to all third party
      beneficiaries of this Agreement that (a) such party has the full right, capacity
      and authority to enter into, deliver and perform its respective obligations
      under this Agreement, (b) this Agreement has been duly executed and delivered
      by
      such party and is the binding and enforceable obligation of such party,
      enforceable against such party in accordance with the terms of this Agreement
      and (c) the execution, delivery and performance of such party’s obligations
      under this Agreement will not conflict with or breach the terms of any other
      agreement, contract, commitment or understanding to which such party is a party
      or to which the assets or securities of such party are bound.

     

    8. Company
      and Transfer Agent.
      The
      Company is hereby authorized to disclose the existence of this Agreement to
      its
      transfer agent. The Company and its transfer agent are hereby authorized to
      decline to make any transfer of the Common Stock if such transfer would
      constitute a violation or breach of this Agreement and/or the Purchase
      Agreement.

    


    9. Third-Party
      Beneficiaries.
      Each
      Shareholder and the Company acknowledge and agree that this Agreement is entered
      into for the benefit of and is enforceable by the Shareholders and their
      successors and assigns.

     

    10. Notices.
      All
      notices, demands, consents, requests, instructions and other communications
      to
      be given or delivered or permitted under or by reason of the provisions of
      this
      Agreement or in connection with the transactions contemplated hereby shall
      be in
      writing and shall be deemed to be delivered and received by the intended
      recipient as follows: (i) if personally delivered, on the business day of such
      delivery (as evidenced by the receipt of the personal delivery service), (ii)
      if
      mailed certified or registered mail return receipt requested, four (4) business
      days after being mailed, (iii) if delivered by overnight courier (with all
      charges having been prepaid), on the business day of such delivery (as evidenced
      by the receipt of the overnight courier service of recognized standing), or
      (iv)
      if delivered by facsimile transmission, on the business day of such delivery
      if
      sent by 6:00 p.m. in the time zone of the recipient, or if sent after that
      time,
      on the next succeeding business day (as evidenced by the printed confirmation
      of
      delivery generated by the sending party’s telecopier machine). If any notice,
      demand, consent, request, instruction or other communication cannot be delivered
      because of a changed address of which no notice was given (in accordance with
      this Section 4), or the refusal to accept same, the notice, demand, consent,
      request, instruction or other communication shall be deemed received on the
      second business day the notice is sent (as evidenced by a sworn affidavit of
      the
      sender). All such notices, demands, consents, requests, instructions and other
      communications will be sent to the following addresses or facsimile numbers
      as
      applicable.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

      

        If
          to the
          Company: 

         

        China
          New
          Energy Group Company

        c/o
          Tianjin Sing Ocean Public Utility Development Co., Ltd.

        17th
          Floor, HongJi Building, JinWei Road

        HeBei
          District, Tianjin, China

        People’s
          Republic of China

        Attention:
          Jia Ji Shang

        Tel:     (86
          22)
          2804 8651

        Fax:    (86
          22)
          2804 8657

        Email: 
          jameswang@etlg.net

         

        with
          copies (which copies shall not constitute notice to the Issuer)
          to: 

        


         Thelen
          Reid Brown Raysman & Steiner LLP

        701
          8th
          Street NW

        Washington,
          D.C. 20001

        Attn.:
          Louis A. Bevilacqua, Esq.

        Tel.
          No.:
          (202) 508-4281

        Facsimile:
          (202) 508-4321

        Email:
          lbevilacqua@thelen.com

         

        If
          to
          China Hand:

        


        China
          Hand Fund I, LLC

        558
          Lime
          Rock Road

        Lakeville,
          CT  06039

        Attn:
          Mary Fellows

        Tel.
          No.:
          860-435-7000

        Fax
          No.:
          860-435-6540

        Email:
          mfellows@kuhnsbrothers.com

         

        with
          copies (which copies shall not constitute notice to the Issuer)
          to: 

        


        Guzov
          Ofsink, LLC

        600
          Madison Ave. 14th Floor

        New
          York,
          New York 10022

        Tel:
          (212) 371-8008, Extension 102

        Fax:
          (212) 688-7273

        Email:
          dofsink@golawintl.com


         

        If
          to an
          Existing Shareholder, 

         

        The
          address set forth below the signature of such Existing Shareholder on the
          signature page

         

        or
          to
          such other address as any party may specify by notice given to the other
          party
          in accordance with this Section 9.

      

    

     

    11. Amendment.
      This
      Agreement may not be modified, amended, altered or supplemented, except by
      a
      written agreement executed by each of the parties hereto.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    12. Entire
      Agreement.
      This
      Agreement contains the entire understanding and agreement of the parties
      relating to the subject matter hereof and supersedes all prior and/or
      contemporaneous understandings and agreements of any kind and nature (whether
      written or oral) among the parties with respect to such subject matter, all
      of
      which are merged herein.

     

    13. Governing
      Law.
      This
      Agreement shall be governed by and construed in accordance with the laws of
      the
      State of New York applicable to agreements made and to be performed in that
      state, without regard to any of its principles of conflicts of laws or other
      laws which would result in the application of the laws of another jurisdiction.
      This Agreement shall be construed and interpreted without regard to any
      presumption against the party causing this Agreement to be drafted.

     

    14. Waiver
      of Jury Trial.
      EACH OF
      THE PARTIES HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES THE RIGHT TO A TRIAL
      BY JURY IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
      AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PARTIES
      UNCONDITIONALLY AND IRREVOCABLY CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE
      COURTS OF THE STATE OF NEW YORK LOCATED IN NEW YORK COUNTY AND THE FEDERAL
      DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK WITH RESPECT TO ANY SUIT,
      ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
      TRANSACTIONS CONTEMPLATED HEREBY, AND EACH OF THE PARTIES HEREBY UNCONDITIONALLY
      AND IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN NEW YORK COUNTY OR SUCH
      DISTRICT, AND AGREES THAT SERVICE OF ANY SUMMONS, COMPLAINT, NOTICE OR OTHER
      PROCESS RELATING TO SUCH SUIT, ACTION OR OTHER PROCEEDING MAY BE EFFECTED IN
      THE
      MANNER PROVIDED IN SECTION 4.

     

    15. Severability.
      The
      parties agree that if any provision of this Agreement shall be held to be
      invalid, illegal or unenforceable in any jurisdiction, that holding shall be
      effective only to the extent of such invalidity, illegally or unenforceability
      without invalidating or rendering illegal or unenforceable the remaining
      provisions hereof, and any such invalidity, illegally or unenforceability in
      any
      jurisdiction shall not invalidate or render unenforceable such provision in
      any
      other jurisdiction. It is the intent of the parties that this Agreement be
      fully
      enforced to the fullest extent permitted by applicable law.

     

    16. Binding
      Effect; Assignment.
      This
      Agreement and the rights and obligations hereunder may not be assigned by any
      party hereto without the prior written consent of the other parties hereby.
      This
      Agreement shall be binding upon and shall inure to the benefit of the parties
      hereto and their respective successors and permitted assigns.

     

    17. Headings.
      The
      section headings contained in this Agreement (including, without limitation,
      section headings and headings in the exhibits and schedules) are inserted for
      reference purposes only and shall not affect in any way the meaning,
      construction or interpretation of this Agreement. Any reference to the
      masculine, feminine, or neuter gender shall be a reference to such other gender
      as is appropriate. References to the singular shall include the plural and
      vice
      versa.

     

    18. Counterparts.
      This
      Agreement may be executed in two or more counterparts, and by the different
      parties hereto in separate counterparts, each of which when executed shall
      be
      deemed to be an original, and all of which, when taken together, shall
      constitute one and the same document. This Agreement shall become effective
      when
      one or more counterparts, taken together, shall have been executed and delivered
      by all of the parties.

     

    [REMAINDER
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        5

        
          

        

      

      
        
        

      

    

    


    IN
      WITNESS WHEREOF,
      the
      parties hereto have executed this Agreement as of the day and year first above
      written.

    

      
        	
                CHINA
                  NEW ENERGY GROUP COMPANY

              
	 
	
                By:

              
	 
	
                /s/
                  Shang Jiaji

              
	
                Name:
                  Shang Jiaji

              
	
                Title:
                  Chief Executive Officer and Chairman of the

                Board
                  of Directors

              
	 
	
                THE
                  CHINA HAND FUND I, LLC

              
	 
	
                By:

              
	 
	
                /s/
                  John D. Kuhns

              
	
                Name:
                  John D. Kuhns

              
	
                Title:  
                  Member-Manager

              


      

    


    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    


    IN
      WITNESS WHEREOF,
      the
      parties hereto have executed this Agreement as of the day and year first above
      written.

    
      
        

          
            	
                    Existing
                      Shareholders:

                  
	 
	
                    QUICK
                      RISE INVESTMENTS LIMITED

                  
	 	 
	
                    By:

                  	
                    /s/
                      Jiaji Shang

                  
	 	
                    Name:
                      Jiaji Shang

                  
	 	
                    Title:
                      Executive Director

                  
	 
	
                    WATERPOWER
                      INVESTMENTS LIMITED

                  
	 	 
	
                    By:

                  	
                    /s/
                      Jiaji Shang

                  
	 	
                    Name:
                      Jiaji Shang

                  
	 	
                    Title:
                      Executive Director

                  
	 
	
                    ETERNAL
                      INTERNATIONAL HOLDING

                    GROUP
                      LIMITED

                  
	 	 
	
                    By:

                  	
                    /s/
                      Jiaji Shang

                  
	 	
                    Name:
                      Jiaji Shang

                  
	 	
                    Title:
                      Executive
                      Director

                  


          

        

      

    

     

    
      
        
        

      

      
        7